DEFINITION of 'Ceding Company'
An insurance company that passes the part or all of its risks from its insurance policy portfolio to a reinsurance firm. Passing off risk in this manner allows the ceding company to hedge against undesired exposure to loss and frees up capital to use in writing new insurance contracts.
The ceding company retains liability for the reinsured policies, so although claims should be reimbursed by the reinsurance firm, if the reinsurance company defaults, the ceding company may still have to make a payout on reinsured policy risks.
BREAKING DOWN 'Ceding Company'
Insurance is a highly regulated industry which requires insurance companies to write certain semi-standardized policies and maintain sufficient capital as collateral against losses. Insurance companies can use reinsurance to allow them more freedom in controlling their operations. For instance, in cases where the insurance company does not wish to carry the risk of certain losses in a standard policy, these risks can be reinsured away. An insurer can also use reinsurance to control the amount of capital it is required to hold as collateral.